2022 (4) TMI 1182 - AT - Income Tax

Depreciation on software ERP SAP - @ 60% OR 25% - AO held that deprecation at the rate of 60% is allowable only on computers and software embedded in such computers which are part and parcel and are inseparable, therefore, according to the AO assessee has acquired only the license and hence, it is eligible for depreciation at the rate of 25% applicable to intangible assets - HELD THAT - The issue is squarely covered in favour of the assessee by the decision of Computer Age Management Services (P.) Ltd 2019 (7) TMI 1153 - MADRAS HIGH COURT wherein depreciation held that software lincense acquired by the assessee was in nature of application software and is eligible for deprecation at the rate of 60%. As concluded if a particular article would fall within the description by the force of the words used, it is impermissible to ignore the word 'description' and going by the usage of the equipment purchased by the assessee, a decision has to be arrived at. We find that there is no error in the decision arrived at by the Tribunal by taking note of the specific entry in contra distinction with the general entry. Therefore, the first substantial question of law has to be necessarily answered against the Revenue.

Summary

Issues:
Disallowance of depreciation on software ERP SAP at a rate of 60% or 25%.

Analysis:
1. The appeal was filed against the order confirming disallowance of depreciation on software ERP SAP. The assessee, engaged in manufacturing, claimed depreciation at 60%, while the assessing officer allowed only 25% as the software was considered an intangible asset. The dispute centered on the nature of the software and its eligibility for higher depreciation.

2. The assessing officer contended that the software was akin to a license, making it an intangible asset eligible for 25% depreciation. The Commissioner of Income-tax (Appeals) upheld this view, stating that the software was application software sold under certain restrictions, akin to a license for a fixed period. Hence, the disallowance of ?3,84,70,669 was confirmed.

3. The assessee argued that as per the depreciation schedule, computer software was eligible for 60% depreciation, without distinction between system and application software. Citing legal precedents, the assessee highlighted cases where software licenses were allowed higher depreciation rates, emphasizing the nature of the software acquired.

4. The Tribunal analyzed the definitions and provisions under the ITAT Rules regarding depreciation rates for tangible and intangible assets. Referring to the decision of the Hon'ble Madras High Court, the Tribunal concluded that the software license acquired by the assessee fell under the definition of computer software eligible for 60% depreciation. The Tribunal emphasized the specific entry in contrast to the general entry under the rules, supporting the assessee's claim.

5. Consequently, following the Madras High Court decision, the Tribunal directed the Assessing Officer to delete the disallowance of depreciation on computer software, allowing the assessee's appeal. The judgment favored the assessee's contention that the software license should be treated as tangible assets for depreciation purposes, entitling them to the higher rate of 60%.

6. In conclusion, the Tribunal's detailed analysis and reliance on legal precedents clarified the nature of the software license acquired by the assessee, leading to the allowance of higher depreciation at 60%. The judgment highlighted the importance of specific entries in determining depreciation rates for assets and upheld the assessee's claim in this case.